After the publication of articles about the “kitchen”, the brokers A-Book, B-Book, the need arose to make a small clarification on the subject of on-exchange and OTC markets in simple words, because, as I understand it, there is some confusion in the understanding of not only the broker, but markets in general. First, let me remind some theses:
A-Book— a broker who acts as an intermediary, makes money through the spread (difference in price between buying and selling), brings the client to the world markets.
B-Book— a broker who acts as a counterparty for transactions and makes money on what the traders lose. Deals are closed through clearing (offsetting) no access to world markets.
“The kitchen”— broker of B-Book type, which makes every effort to trader is left without a deposit. For example, interferes with the movement of the trend, independently takes orders under various pretexts, doesn’t hold winning trades.
Exchange and OTC markets can be described simply: in the first case, everything happens on the exchange, while in the second the buyers and sellers do find each other. Well, or the liquidity providers or market makers help in it. The Forex is an OTC market. The broker takes the trader into the Internet network, where the liquidity of the currency provides, for example, an investment bank. It seems that everything is clear. But what about the stock market?
Exchange and OTC markets
According to the Moscow exchange, in January 2017, the leaders were:
the number of registered customers: VTB 24 (251 157 of the traders), Sberbank (198 417), BCS (189 of 330). Closes the top-10, OOO “Investment chamber” — 19 859 traders;
number of active customers who at least once in a month made a deal on account: Finam (16 290 traders), Sberbank (14 564), BCS (14 113). Closes the top-10 of the criminal code “Alfa Capital” — 1 777 traders.
If you look at tools of such big brokers like the Forex Club, LiteForex, InstaForex, they’re talking about investing in securities. However, in the top-25 MB these brokers are not included, although the number of active customers is much higher.
Question: what constitutes reliability? The number of active customers in 2-5 thousand, but a top spot on the MB where there’s a minimum regulation of the stock exchange and the Central Bank. Or stock, gold trading, through OTC brokers? Exchange and OTC markets: what is safer and more productive?
The business owner who wants to raise money through the sale of the shares, carries out IPO (primary placing at a stock exchange). Not even in principle, if this placement is the first or not. The investor can buy a stake, becoming a real member of the company. Securities may be in certificated or uncertificated form. Information about purchasing of securities of investors is reflected in the state agencies in the list of shareholders, shares are credited to a special account in the depository. The investor becomes the owner of the real asset.
Metals, oil, securities — the principle is the same. The investor buys via the trading platform not the real asset but the contracts. And brokers are often confused with economic terminology to create a beautiful image. For example, in the OTC market may not be futures contracts. Futures are just exchange-traded instrument. And futures themselves provide for the execution of contract through time, and in the OTC market this is not happening. By the way, all brokers, like to call all the OTC market the Forex, though the Forex is only the currency OTC market.
Example: in the American market there are shares of Facebook. A trader in Russia suggests that the stock will grow and… does not buy shares himself, but only a contract under which he will be paid the difference in the case of growth of cost of papers. In other words, bet on where the price will move. Very similar to binary options, right? The investor becomes the owner of the gold bullion or securities, even if the contract itself constitutes the only numbers in the personal account.
In the case of B-Book in this example the counterparty to the transaction was the broker. Since the losers are usually more, the company is working in profit. Once the trader becomes successful, the broker puts him on the international OTC market. There are always wishing to buy or sell an asset. And if the stock market asset is limited to the proposal (e.g., shares redeemed institutional investors, and individual traders only observe what is happening), then in the OTC market, the number of transactions is not limited and is determined only by the presence of people willing to buy/sell the asset at the desired price of the desired volume. However, for transactions there is no real asset, but trade of air suits everyone — all traders know the rules of the game.
Summary. Exchange and OTC markets have their pros and cons. “Trade air” on the OTC markets also has the right to life, although in fact it is pure speculation. The bubble does not occur, because the real asset of the transaction is not affected. The OTC market is more suitable for speculation — here transactions can occur within minutes. The stock market gives a real opportunity of ownership of the asset, but is only suitable for a portfolio investment with a large starting capital. On the OTC market the risk to get into the kitchen is more, but the trade here is completely different.
In conclusion, let me clarify that this is only my simplistic view on exchange and OTC market. So I invite readers to discuss!